Regions Financial Corp (RF) 2010 Q4 法說會逐字稿

Good morning and welcome to the Regions Financial Corp.'s quarterly earnings call.

My name is Melissa and I will be your operator for today's call.

I would like to remind everyone that all participants on line have been placed on listen-only.

At the end of the call, there will be a question-and-answer session.

(Operator Instructions).

I will now turn the call over to Mr.

List Underwood to begin.

Good morning, everyone, and we appreciate very much your participation today.

Our presenters are our President and Chief Executive Officer, Grayson Hall; our Chief Financial Officer, David Turner, and also here and available to answer questions is [Barb Godden], our Chief Credit Officer.

Let me quickly touch on presentation formats.

We have prepared a short slide presentation to accompany David's comments.

It is available under the Investor Relations section of Regions.com.

For those of you in the investment community that dialed in by phone, once you're on the Investor Relations section of our website, just click on live phone player and the slides will automatically advance in sync with the audio of the presentation.

A copy of the slides is available on our website.

With that said, I will direct your attention to the forward-looking statements slide that should be on the screen right now.

With that, I will turn it over to Grayson.

Thank you, List.

Good morning, everyone, and thank you for your interest in Regions Financial.

Fourth-quarter results reflected continued progress towards achieving our primary goal of returning Regions to sustainable profitability.

In the quarter, Regions' reported earnings were $36 million or $0.03 per share profit, which included elevated credit costs that were partially offset by our decision to preserve our capital position while recognizing approximately $333 million of investment security gains.

On an after-tax basis, the impact of security gains amounted to approximately $0.16 per share.

Credit costs including provisioning, OREO and marks on loans held for sale were an estimated $0.37 per share after tax.

Notably, our core business performance this quarter included solid growth in middle market C&I loans of $1 billion or 5%, strong low-cost deposit growth of $1.1 billion or 2%, and an increase our net interest income and margin and a $47 million, or 6% rise, in adjusted noninterest income.

Additionally, loan loss provision matched net charge-offs of $682 million.

Although challenges remained, we are encouraged by signs of economic recovery, generally improving credit quality metrics, and our continued success in profitably expanding our customer base.

We are recognizing an improving economy and most of our markets, but we expect the Southeastern economy to recover at a somewhat slower pace, particularly in Florida where housing remains a serious concern and unemployment continues to stubbornly hover near 12%.

We expect to continue to make steady progress towards our goal of returning Regions to sustainable profitability, while also aggressively working through problem assets and reducing our more stressed loan portfolios.

We did sell $405 million into stressed loans and foreclosed property in the fourth quarter and our investor real estate loans at period end totaled $15.9 billion.

We have taken a strong stance and subjected our loan portfolios to rigorous internal and external reviews.

We have a solid understanding of the risks of our portfolio and are confident in our abilities to successfully resolve the remaining problem assets.

Furthermore, our early and late stage delinquencies are down again and internally risk rated problems have now declined for the fourth quarter in a row -- a precursor, we think, to additional improvements in nonperforming loan inflows.

In fact, fourth-quarter gross nonperforming loan inflows while still elevated were down approximately $400 million or 29% from the third-quarter level.

Total nonperforming assets declined over $300 million linked quarter or 7%, marking the third consecutive quarterly decrease.

Investor real estate continues to drive nonperforming loan inflows at 56% of the total nonperforming loan inflow this quarter.

As a result, we remain disciplined and cautious in our continuous assessment of credit quality, which has led us to classify a number of credits as nonperforming due to identified weaknesses even though they are current and paying agreed.

With that in mind, approximately 37% of business services nonperforming loans at year-end were current and paying as agreed, an increase from 36% at September 30.

Income-producing investor real estate accounted for 29% of fourth-quarter total nonperforming loan inflows compared to 23% a year ago.

Although we are devoting considerable time and resources to working through credit issues, the majority of our associates' focus is on profitable growth in our core business.

In the fourth quarter alone, average low-cost deposits grew $1.4 billion, bringing the full year 2010 increase to nearly $7 billion.

This further improved our deposit mix and lowered our overall deposit cost.

And for the second consecutive year, I'm proud to say that we again achieved a strong year in new checking account openings with 996,000 opened, right at our goal of 1 million new accounts.

At year-end, CDs represented 24% of total deposits, down from 32% in the same period last year.

Our overall cost of deposits have declined 51 basis points from 115 basis points a year ago and a total 64 basis points for the fourth quarter of this year -- of last year.

During 2011, we expect our deposit mix and cost to continue to improve.

As to loans, commercial loan production totaled $14.4 billion of which $4.9 billion was new loan production, a 50% increase over the same period in the prior year.

We experienced solid C&I loan growth in the fourth quarter.

C&I [period end] loans primarily middle-market up 5% or $1 billion linked quarter.

Notably C&I increases were more broadly distributed across our footprint as 14 of the 20 markets increased C&I outstandings in the quarter and at the top of the Company, we have increased C&I outstandings overall for six straight months.

This did not come from line utilization.

Line utilization remains at historic levels just slightly above 40%, as commercial customers are still not yet building their working capital.

But we are seeing loan growth from capital expenditures, mergers, acquisitions, and industries with high capital needs such as healthcare, transportation, and oil and gas.

And importantly much of our loan growth is attributed to taking market share from competitors.

In the fourth quarter, we experienced a 5% growth in line commitments and our sales pipelines remain strong.

Consumer loan production was $3.2 billion with $2.6 billion in mortgage production and, importantly, $143 million auto lending production.

Consumer loan outstandings continue to decline as individuals are still paying down debt.

But we are starting to see positive signs.

Mortgage production for the year was $8.2 billion and, as I mentioned, $2.6 billion for the fourth quarter alone.

In the fourth quarter, we did reduce investor real estate $1.6 billion, bringing full year 2010's decline to approximately $6 billion.

Additionally, aggregate loans outstanding were also impacted by the fourth quarter by the sale of approximately $965 million in residential first mortgages, which David will provide further detail in a moment.

Looking ahead, we continue to leverage our strength as a top small business lender by emphasizing our branch-based small-business lending to preferred industries, staying focused on increasing sales of existing products.

And introducing new consumer product solutions, we expect to see positive results from changes in our consumer and small business model.

Furthermore, we should see middle-market C&I loans continue to grow this year as we benefit from our strong franchise, active calling program, broad-based product capability, and superior customer service.

Nonetheless, total loans outstandings are likely to be challenged in 2011 due to the ongoing, de-risking strategy of our portfolio.

Fee income is another area where our growth strategies are paying off.

Our 2010 mortgage production of $8.2 billion was the second-best in Regions history.

Morgan Keegan achieved results of 12% over third quarter and 9% over the same period a year ago.

Assets under management are up to $157 billion or 3.5% higher than the third quarter and 7.9% over prior year period.

We also experienced a record quarter in interchange and ATM income for the year, $368 million.

Debit card income is up 18% compared to the same period a year ago, driven by an 8% increase in cards and a 13% increase in spending levels.

In addition, our new checking account customers are electing to have debit cards 87% of the time, a record level of penetration for this product.

In fact, despite a tough operating environment, we have achieved year-over-year fourth-quarter growth in virtually all of our fee-based businesses.

Nevertheless, depending on ultimate regulatory changes related to interchange fees and the timing of their implementation, we face additional fee income challenges in 2011.

We are working to develop mitigation strategies to rationalize our business under these proposed rule changes.

These changes obviously will impact the way we charge for banking services.

But as always, our business requires that we deliver value to our customers in terms of service, products, features, and pricing.

We are trying to better understand both the intended and the unintended consequences of these changes.

But we know our business, and we will promptly make the necessary adjustments.

In summary, we are encouraged by an improving economic environment this year and strongly believe we have the appropriate strategies in place to capitalize on quality revenue growth opportunities while continuing to limit operating expenses and eliminate nonessential spending.

Regulatory challenges will present revenue headwinds, but we are already taking steps to mitigate the potential negative impact.

Our customer focus is resulting in incrementally profitable business and increasing market share.

Although credit costs are expected to remain elevated in the near term, they should begin to diminish during the year.

Our capital and liquidity positions are strong.

All in all, we expect continued progress towards our primary goal, returning Regions to sustainable profitability.

Finally, I want to thank Regions' associates for their hard work.

Their attention to service quality and loyalty continue to pay off in the fourth quarter and throughout the year.

The Company's success on this front has been validated by Gallup, which has identified Regions as a top-decile performer in customer loyalty.

According to J.D.

Power and Associates, Regions ranks among the most improved retail banks in customer satisfaction and in the top five in customer satisfaction in the country among primary mortgage servicing companies.

And Regions also ranked fourth in 2010 US Small Business Banking Satisfaction survey.

Independent research by TNS ranks Regions brand favorability the highest of 11 major banks tested within our Company's markets.

Additionally, Prime Performance recently recognized Regions as a top score in the category of friendliness and best overall satisfaction with service among all large and regional banks, which favorably positions Regions to gain market share.

By adhering to our strategy of focusing on the customer, we are continuing to build a stronger company which will result in long-term benefit to our stakeholders.

David?

Thank you and good morning, everyone.

Let's begin with a summary of our fourth-quarter results on slide one.

As Grayson mentioned, our fourth-quarter earnings amounted to $0.03 per diluted share.

Pre-tax pre-provision net revenue or PPNR totaled $824 million, including several non-core transactions which are reflected in the supplement on page 10 and included $333 million in security gains; a $26 million gain related to residential mortgage loan sales; $59 million in leverage lease termination gains, which were offset by a similar amount of tax expense; and a $55 million loss related to the early extinguishment of debt.

Adjusting for these items, our adjusted PPNR was $461 million, 2% higher than the prior quarter and 19% higher compared to the same period a year ago.

On an annual basis, adjusted PPNR was 4% higher for the full year 2010 versus 2009.

Within PPNR, net interest income was up $9 million and the resulting net interest margin improved 4 basis points to 3%.

Adjusted non-interest revenues totaled $795 million, up 6% linked quarter, reflecting strong revenues at Morgan Keegan.

Increased debit card volume and fee-based account growth helped somewhat offset the negative impact from Regulation E.

Adjusted noninterest expenses increased $49 million or 4% third to fourth quarter, negatively impacted by an increase in professional and legal fees and incentive-based compensation.

Regarding credit quality, the level of nonperforming loans declined over $200 million or 6% linked quarter.

This represents the third consecutive quarter of declining nonperforming loans.

The provision for loan losses declined $78 million to $682 million and essentially equaled net charge-offs.

Our allowance to net loans ratio increased 7 basis points to 3.84%.

Let's now take a more detailed look at our credit results, beginning with NPL inflows.

The inflow of nonperforming loans declined to $947 million in the fourth quarter, 29% less than the third quarter's $1.3 billion.

Our early and late stage delinquencies are down again and our internally risk rated problem loans declined for the fourth consecutive quarter.

These asset quality indicators serve as an important barometer in estimating future inflows of problem loans and, as a result, we expect future NPL inflows to continue this downward trend throughout 2011.

Income-producing commercial real estate continues to drive NPL inflows, accounting for 29% of fourth quarter's migration.

As a reminder, income producing CRE credits can be more easily restructured and should ultimately result in lower loss severities than our land, condo, and single-family portfolio which, together, totaled $3.2 billion as of year-end.

These portfolios contributed approximately 28% of fourth quarter's NPL inflows.

A substantial portion of our nonperforming loans continues to be current and paying as agreed.

37% of our total business services NPLs that remained as of year end were current and paying as agreed, up from 36% in the third quarter and 23% from a year ago.

Now, let's look at our overall nonperforming assets.

As you can see, nonperforming assets declined 7% this quarter from $4.2 billion to $3.9 billion and have now declined three consecutive quarters.

We sold over $405 million of NPAs this quarter at a discount of approximately 25%, with $96 million consisting of OREO and the remaining $309 million from nonaccrual asset sales.

Moving onto net charge-offs, net charge-offs declined $78 million linked quarter to $682 million for an annualized 3.22% of average loans.

At year-end 2010, our loan loss allowance to nonperforming loan coverage ratio was 101%, up from a year earlier's 89% as well as the prior quarter's 94%.

The continued decline in gross migration of nonperforming loans and the continued decline in nonperforming loan balances will be key indicators in determining our provision expense in future periods.

Turning to the balance sheet, slide 5 breaks down this quarter's change in loans.

Ending and average loans were down 2%.

However again this quarter, we saw strength in our middle market C&I loan portfolio as average and ending loans increased 3% and 5% linked quarter, respectively.

Much of this loan growth was attributable to taking market share from our competitors as is evidenced by growth in line commitments which increased from $25 billion in September to $26.3 billion or 5% at the end of the year.

And as Grayson stated earlier, our customers' utilization rates have not returned to normalized levels but continue to persist at low rates of approximately 40%.

In fact, 25% of our business services customers with a commitment have zero outstanding balances.

Ending investor real estate declined 9% and has been reduced 27% this year.

We will continue to de-risk this portfolio in 2011 and are still targeting to reduce this portfolio to 100% of the base -- of the bank's risk-based capital, which currently approximates $14 billion.

The linked quarter decline in residential first mortgage portfolio is due to a $965 million sale which I will discuss in a moment.

Moving onto deposits.

Ending and average deposits were relatively stable third to fourth quarter, but the mix continued to improve with average low-cost deposits of 2% compared to a 7% decline in average time deposits.

For the year, average low-cost deposits rose 11% compared to a 27% decline in time deposits.

Our shift in funding mix to low-cost deposits is favorably impacting our total funding costs as well.

In fact, our total funding costs declined 11 basis points to 0.91% in the quarter.

Taxable equivalent net interest income improved $10 million or 1% linked quarter and increased $97 million or 3% for the full year 2010 versus 2009.

The net interest margin improved 4 basis points during the quarter to 3% and was up 28 basis points year over year.

Deposit costs declined another 6 basis points to 0.64% in the fourth quarter and have declined 51 basis points in total this year.

Pricing opportunities remain to reduce deposit costs as we have approximately $13.5 billion of CDs maturing in 2011.

And of that, we have $4.8 billion of CDs maturing in the first quarter that carry an average rate of 2.28% and will be repriced at lower market rates.

We continue to experience improvement in loan pricing as evidenced by this quarter's 5 basis points rise in loan yields to 4.34%.

We remain disciplined when pricing new loans, ensuring we are appropriately paid for the risks we're taking and believe, that going forward, widening loan spreads will be a key determinant of margin improvement.

That said, the margin will face some headwinds in the near term.

As a result of the ratings actions during the fourth quarter, we became more defensive from a liquidity perspective and continued to maintain a low -- loan to deposit ratio of 88%.

Excess liquidity impacted the margin by 11 basis points this quarter, compared to 8 basis points in the prior quarter.

During the fourth quarter, we executed sales of $8.1 billion of agency mortgage-backed securities resulting in $333 million of security gains, the proceeds which were reinvested in similar securities but slightly longer durations.

And as previously noted, we also sold $965 million of residential first mortgages in the fourth quarter and reinvested the proceeds in Ginnie Mae securities.

Both of these transactions allow us to preserve capital.

As a result of the securities repositioning, the sale of mortgage loans, and increases in longer duration deposits, the balance sheet in total remains asset-sensitive.

However, the impact to our net interest margin from our investment portfolio repositioning and the other activities for the first quarter is estimated to be between 5 and 10 basis points lower.

Let's now shift gears and look at non-interest revenue and expenses for the quarter.

Adjusted non-interest revenues increased 6% linked quarter driven by solid, solid interchange income due to increased debit card volume and fee-based account growth, and an increase in Morgan Keegan revenues, which reflected strength in investment banking and private client.

Non-interest revenue was negatively impacted $13 million by mortgage servicing rights valuations.

Regulation E negatively impacted service charge revenue in the second half of 2010 by approximately $57 million which is in line with our estimate last quarter of between $50 million and $60 million.

We began migrating accounts from free to fee eligible last May, and by March 1 of this year, all of our new and existing checking accounts will be fee eligible.

This, along with our mitigation efforts and interchange income growth, is largely offsetting Regulation E's effect.

Importantly, we have implemented these changes while still growing low-cost deposits.

Excluding the impact of the Durbin amendment, which is not yet finalized, we expect 2011 core noninterest revenues to increase somewhat over the 2010 levels.

Excluding the $55 million loss on early extinguishment of debt, fourth-quarter adjusted noninterest expenses rose $49 million or 4% linked quarter due to a $21 million linked quarter rise in professional and legal fees and incentive-based compensation.

Expenses related to other real estate owned and loans held for sale continue to be elevated and amounted to $75 million in the fourth quarter versus $70 million in the third quarter.

However, in 2011, these costs are expected to gradually improve versus fourth-quarter 2010's level.

We fully recognize that, in today's environment, we must remain diligent in our efforts to manage expenses, especially since we continue to forecast a low growth, low rate environment for an extended period of time.

Consequently, we constantly review all areas of staffing and have eliminated approximately 700 positions in 2010.

We also review occupancy and discretionary expenditures for opportunities to improve productivity and efficiency.

We expect our core noninterest expenses in 2011 to be slightly down from the 2010 level.

Let me now discuss our capital and liquidity.

As part of our capital planning process, we recently concluded our capital plan for our Board and regulatory supervisors.

Our current Tier 1 common and Tier 1 ratios stand at a solid 7.9% and 12.4%, respectively, and on a Basel III pro forma are 7.6% and 11.4%, well above the respective 7%, 8.5% minimum as required under Basel III.

Let me also point out that our capital ratios at the bank level remain healthy as well.

When evaluating our capital ratios, we primarily managed to Tier 1 comment ratio because we believe that risk-based measure is the most appropriate one in assessing our capital.

Our liquidity at both the bank and the holding company remain solid.

In summary, we believe that fourth-quarter results demonstrate that we are making solid progress in executing our plan to return Regions to sustainable profitability.

With that, Operator, that concludes our remarks and we can open it up for questions.

(Operator Instructions).

Kevin St.

Pierre of Sanford Bernstein.

The third-quarter 10-Q, you had identified $1 billion of potential problem commercial and investor real estate loans.

And then looking at the NPL inflow slides, slide 2, is it correct that about $700 million of those went on NPL status?

In what slide --?

Kevin, which slide are you --?

I am looking at the NPL inflows by type, slide 2, the left side.

And so restate your question again.

So in the Q, you had identified approximately -- said approximately as of September as of September 30, 2010, you had approximately $1 billion of potential problem commercial and investor real estate.

That's the $947 million is equivalent to that $1 billion as we stated or the potential problems.

So the $947 million is the number now?

$947 million is the actual number that migrated into nonperforming this quarter.

The $1 billion was our estimate of those loans that were current, paying as agreed they were accruing loans, but had the potential because of some risk that we saw in them the could migrate in the future -- future quarters to nonperforming.

So the $947 million came out of that $1 billion.

Okay, so predominantly, all of them float into nonperforming?

Yes.

That's correct.

And can you update that $1 billion number for December 31?

What we can tell you is that -- and we will have that obviously disclosed in our Q when we finish our calculation -- but if you look at our early-stage delinquencies, and you look at our late stage delinquencies.

you look at our internally risk-rated problem loans that -- we are saying all those are down which gives us confidence that our migration is trending down.

We have not come up with a final number of what will be in that 10-K at the end of the year yet.

Okay.

Thank you very much.

Scott Valentin of FBR Capital Markets.

Good morning.

Thanks for taking my question.

Just regarding the NPA inflows, they were down linked quarter, but if I recall correctly, third quarter had a change in policy on the NPA side which contributed to some of that growth.

And I guess, were there any changes at all in the NPA policy this quarter or any kind of 4Q cleanup?

Because we were kind of expecting a lower level of NPA inflows.

Well there was really no -- this is Barb Godden.

There was no cleanup this quarter and even last quarter.

It wasn't a policy change, it was just a more rigorous review about what's actually in our portfolios to make sure that we have identified everything where there was no guarantors' support, as an some example, that we decided that we would move those into nonperforming loans.

And that is the reason you saw the spike last quarter, but not this quarter.

Okay.

Thanks very much.

Marty Mosby of Guggenheim Securities.

Good morning.

David, congratulations on hitting your 3% net interest margin goal.

You've been working on that for a while.

And you know what I was wanting to ask was, as we've gotten to this benchmark and now we are talking about maybe giving some of it back, how are we seeing that as you get into the first half of next year?

I mean.

are we really seeing a 10 basis point compression and what are some of the sources for that?

Yes, thanks, Marty.

What we said was we had -- we became much more defensive in the fourth quarter on liquidity, given our ratings action that we are thinking and we still continue to be more defensive than we normally would be with regards to liquidity.

You know, just excess cash that we have cost us about 11 basis points.

As I mentioned, in the fourth quarter, that is up from the 8 basis points in the third quarter.

We do believe as we continue to have our improved migration that we talked about in terms of problem assets and sustainable profitability, that they need to be defensive with regard to liquidity will subside, which will give us the ability to put the excess liquidity to work in a more meaningful manner.

Also if you look at our investment portfolio, it is pretty much all agency guaranteed.

And I think what you'll see is some repositioning out of that over time into other asset classes.

But today liquidity was taking precedence over earnings.

So we hope maybe during the first half, you'll still see pressure there, but it should lighten up towards the back half of the year.

I think the other thing in everything that David said around liquidity in the securities portfolio, I think you have to add to that two things.

One is, what we've seen in the fourth quarter is some of the best loan production that we've seen in quite some time with our commercial loan production of 47% over prior year and our consumer loan production up over 8% over prior year.

But that hasn't translated yet into balance sheet growth, but it's a very positive sign as well as the assets that are on our books that are in investor real estate that are moving off of our books quite rapidly.

The rates there are much less advantageous than the rates of the new business that we're putting on the books, as well as, we are repricing our book as it renews.

We do think some of the actions we took in the fourth quarter will temporarily harm or compress our margin.

But we do plan to earn our way back over time.

And I guess, just following up to that, you mentioned the wider loan spreads.

How are you being able to accomplish that when you've seen the competition and we're really starting to see the commercial and industrial especially across the board, a lot of the banks competing in that same kind of group?

Well, you know, obviously, there's a lot of competition in that particular segment.

What we've seen is an awful lot of competition in the upper end of commercial C&I.

Where we have been most successful is in the commercial middle market and in small business and in some of our specialty lending functions -- in particular, energy, healthcare, and asset-based lending.

We still are seeing opportunities to make loans at rates that we believe pay us for the risks we're taking and are at the spreads that we feel are fair and appropriate for both us and the customer.

And, David, the last thing on this topic and then I will let you move on to the next question is, with your new kind of deposit base that you have, what are you really -- what are you estimating now as your long-term core [noninterest] margin, once you get the benefit of the liquidity going away, the nonperformers going down, and you get the rate sensitivity as rates move higher.

What is the goal that you with long term would be shooting for?

You know, we have talked about you know as things settle out and we get to normal, whether it be liquidity, the marketplace, that we could be in that 3.20% to 3.50% range in terms of margin.

The question is when will all that settle out when we can get back there and get our balance sheet positioned the way we want.

We've talked about moving more from the business services to consumer and that takes some time getting our excess liquidity to work.

When all that happens we think we can get back to those -- that margin range.

But we believe those are reasonable targets for us to have, and we just have to reposition our balance sheet in order to achieve that.

Thank you all.

Betsy Graseck of Morgan Stanley.

Good morning.

Couple of questions.

One's on the reserve ratio.

Obviously remained relatively strong, high in the quarter at [384].

But you have got NPL inflows and balances coming down.

So I'm wondering how you think about that reserve and when we should expect to see some reserve release start?

You know obviously, our perspective is that we are going to stay very disciplined as we look at our allowance methodology.

And as we see improvement in our credit metrics, it's obviously playing in the that process, into that methodology.

We are being careful not to run the risk of premature release of reserves, but as our credit metrics improve, we would expect the process to take that into account, but we are being disciplined at this juncture.

And then as we look at the [CRE] portfolio, I know you are in the process of de-risking runoff on the portfolio, but what do you think the right size is for your organization?

Well, I would tell you that that perspective is evolving.

We clearly have come out and said that we want investors' CRE to be no more than 100% of risk-based capital or $14 billion.

If you look at it, we are at $15.9 billion today at period end and it continues to come down fairly rapidly.

We have no -- we have substantially reduced our exposures and if you look at land, single-family and condominium, at the end of last year we were at about $5.6 billion.

We are about $3.1 billion, $3.2 billion today.

Just down over 44% in 12 months.

And we will continue to de-risk.

We are still making commercial real estate loans.

The demand for that product is fairly limited and is much better underwritten, much better price, but it is not sufficient today to sustain the level of commercial real estate loans that we have.

We will expect that to improve as the economy improves, but it is quite, quite candidly we could see how our commercial real estate loans drift below that targeted level of $14 billion.

Okay.

Thanks.

Craig Siegenthaler of Credit Suisse.

Good morning, everyone.

Can you provide us with some details around the high brokerage, [nonbanking] revenues, really, the Morgan Keegan business in 4Q?

How we should think about a good run rate going forward here.

Well, I think in large part, it is going to continue to be driven by the economy.

We have been -- and the performance of the markets thereof.

As you saw in our businesses there, we are seeing good growth in -- the strongest growth we are seeing is coming out of our investment banking revenues.

As you may recall, about a year ago we combined all of our investment banking activities into one single leadership in the Morgan Keegan and they have continued to show progress as that market has improved.

Our retail brokerage has as well improved.

Fixed income, which has been one of the best performing units within Morgan Keegan, revenues are down slightly there, but still very, very strong.

And our trust business, while not a high-growth business, has been a very good performer from a margin perspective and has been very efficient in their operations.

We believe Morgan Keegan still has the potential to grow from here, but it is going to -- I think when you look at the growth we saw, in assets under management 3.5% quarter over quarter, that was very strong.

It will take favorable markets to sustain that, but I think we've got a team that is focused on growing that business fairly substantially over the next several quarters.

You know, as I think about Morgan Keegan in total, see if the economy continues to improve, you know, you will see some downward pressure in the fixed income, but the private client investment banking, as Grayson mentioned and the consistent performance and trust will serve to mitigate that.

So we are looking for that continued expansion really in investment banking, which showed great promise in the last -- in the fourth quarter.

And just as a follow-up, I don't know if [Matthew Lusk] is on the call or not, but I'm just wondering if there's going to be any changes to the -- how you recognize NPLs or severity evaluation in the first quarter as the current changes made or the changes made in 3Q, is that really kind of a go-forward process at this point?

You know, I think that when you look at our processes around managing credit risks and I will ask Barb Godden to speak just briefly on this, after I make a few comments, today we continue to make process improvements in all of our processes in terms of managing credit risk.

But the primary issue is just continued focus on execution.

Making sure that we are executing our processes in a way that give us confidence, our Board conference and our regulators confidence in sort of where we stand from a credit risk perspective.

Barb?

As you mentioned in third quarter, we took a very critical eye to all of the assets that we had to make sure they were appropriately risk-rated, that we understood the guarantor strength behind all of the loans, and you saw that increase in the third quarter.

But that kind of discipline has carried on certainly into the fourth quarter and I anticipate that discipline will carry on forever, quite frankly, as we look forward.

So I really don't look to any large changes to say that, that we are going to be doing anything significantly differently as we think about the future.

Barb and Grayson, thank you very much.

Matt O'Connor with Deutsche Bank.

I feel bad asking a question on interest-rate risks because all quarter long we were so focused on the credit.

And obviously things are moving in the right direction there, but we did get a big move up in interest rates.

And what is interesting is I think your balance sheet is very well positioned from rising short-term rates, but like a lot of other banks you do have exposure to rising long-term rates.

So I am just wondering how you are thinking about that as you manage the securities book in terms of whether it is trying to hedge some of that, adding floaters and then just generally the size of the securities book going forward?

You are right.

It has been -- it's been tough this past quarter managing that interest rate risk.

But as I mentioned earlier, the liquidity was much more important to us and that's what the investment portfolio is.

We continue to be asset-sensitive.

Perhaps down a little bit from the third quarter, but still asset-sensitive.

So if rates rise, we will benefit from that.

You know, our goal is not to continue to grow our securities portfolio, but as we continue to be successful in the deposit gathering, that gives us some opportunities to -- you know, you saw our prepayment of FHLB that we did literally right after the end of the third quarter.

And I think we disclosed that in our third-quarter 10-Q.

But we can continue to put -- if as we grow deposits, we can be pretty aggressive with the rates there and you know our long-term goal is not to grow our investment portfolio.

Obviously put it to work in loan growth, you heard Grayson's comment in terms of we really have seen some terrific loan growth in the commercial middle market space.

So we will look for opportunities to put that cash to work better.

I think the construct of the investment portfolio is as important.

And we have most of it in agency guaranteed mortgage backs, residential mortgage backs and we are looking at [legging] back into other asset classes that would give us a little better yield for that.

So that's kind of the global comments, I would say.

And then I guess on the net interest margins, a little bit as a follow-up, you gave I think pretty explicit guidance the first quarter and then down maybe 5 to 10 basis points, and then gave us some of the pluses and minuses from there.

Should we expect the first quarter to be the bottom and then kind of flat to trending up from there or maybe more on the back half of the year?

No.

I think you'll see a little bit of a reset there in the first quarter and we should be able to hold kind of where we land in the first quarter throughout the year.

Okay and then just separately on expenses, you've talked about continuing to manage them and, obviously, the environmental stuff it is what it is.

But just more broadly speaking, is there more that you can do in the underlying expense of the Company than when I look at the salaries and benefits, they have been flat the last three years, so a lot has been done.

And I'm just wondering how much more there might be out there?

Well, listen, this is Grayson.

You know, I don't believe that managing expenses is ever over.

There's always opportunities that we have to try to be more efficient and, obviously, with the revenue headwinds that this industry is facing and this institution, in particular, we have to find ways to be more efficient.

You know, we consolidated 122 offices last year and reduced 700 positions out of the Company, as well as reduced a number of discretionary spending categories plus some fairly large amounts.

We continue to do that.

I really don't look at expense reduction as a program, but it's a discipline that you have to have every day in the business.

And we continue to look for opportunities to reduce our expense and you will see that over time.

Obviously environmental expenses are the biggest opportunity we have.

As credit -- as the credit metrics improve, you'll see the benefits from those expenses starting to moderate.

Great.

Thank you.

Ken Usdin from Jefferies.

Good morning.

Looking at the adjustments that you made on the pre-tax pre-provision side, $461 million versus charge-off still in the $680 million range, just wondering if you can help us understand how you expect that gap to narrow over time and at what point do you think you can get back to kind of that core break even as far as pretax pre-provision covering net charge-offs?

Yes, there are a couple of things.

Obviously the biggest one is a continued decline in the credit migration of problem assets, which will result in lower nonperforming loans, which will result in a lower allowance need.

And therefore I forgot who asked an earlier question maybe Betsy in terms of when can we provide lesson charge-offs.

So I think you really have to look at that migration as being a key indicator.

You know, we are feeling better in terms of the trends for migration and the ultimate declines in nonperforming loans.

You can see our chart where we are having more move to accrual status there and also cash collections are increasing.

We do think we are going to have better opportunity to restructure some of those loans and get those out of non-performing in time.

And as, again, as the non-performer comes down and the need for the reserve comes down, we will provide less than charge-offs.

The other component, the other side is really working on the PPNR and we are looking at for new credits that are going on the books, making sure we are being paid appropriately for the risks that we are taking and that has been a big plus for us.

As you saw our improvement in loan spreads of 5 basis points.

We've continued to have ability to reprice deposits in terms of the CDs that are maturing, as I mentioned earlier.

So we will continue to have picked up on that front as well.

And then, from a non-interest revenue standpoint, we think we will be stable from an NIR standpoint throughout the year.

So really turning credit that enables us to provide less than charge-offs and then increasing incrementally our PPNR is how we'll get to that

And

do you think that is something that could happen this year?

And I'm thinking about it more so in terms of before we contemplate reserve release, just in terms of your ability for charge-offs to exceed -- sorry the PPNR to exceed just gross -- net charge-offs.

Well, we have to be careful you know not to give guidance on that issue, but I would add a couple of thoughts to it.

As you look at our charge-offs for the quarter, you know, I would direct your attention to two components of that charge-off.

One is, valuation charges, our collateral valuations.

If you look at it over the past several quarters, it has continued to trend downward.

It has been a substantial part of our charge-offs.

Not that real estate values have bottomed in all of our markets, but obviously the pace of decline has slowed.

And there seems to be some stabilization coming into many markets and those valuation charges, you know, should continue to moderate if the economy continues to go along the same line we are today.

The other component I would tell you to look at is the loans -- distressed loan note sales and foreclosed property sales.

Obviously, a big part of our charge-offs have come out of our aggressive stance on de-risking our portfolio.

We did $405 million in distressed note sales and foreclosed properties this past quarter.

There's a substantial amount of charge-offs that come with that.

We fully expect that strategy to moderate as our inflow moderate and it's -- we have to see that happen first.

And when we see that, then I think there is an opportunity for us to have those two components, PPNR and charge-offs, cross.

Great.

My second question is, can you just update us on what the level of the DTA was at December 31?

And then how you guys think about capital planning with regard to the DTA as far as how you think about your capital levels that you would like to live out going forward?

Okay, we have at the end of the year about $1.4 billion in DTA.

That's up about $275 million from the level in the third quarter.

And that is primarily due to we had deferred tax liabilities that actually offset DTA in the third-quarter rate, related to our unrealized gains in the securities portfolio.

So since we realized those, that DTA went away which increased the -- our deferred tax asset.

You know, right now we disallow about $400 million in capital from the DTA.

That's down slightly from where we were in the third quarter and we do believe that that $400 million will come back to us.

It's about 40 basis points of Tier 1 common.

We believe that is just a matter of time before we can -- when we can take that into our capital calculation.

But in terms of our planning, you know we look at -- we think our Tier 1 common right now is pretty healthy at 7.9%.

You know, we clearly are still a [hold] TARP.

And at some point we will be in position to repay that.

And you know, we will look at what our Tier 1 common we think needs to be from our own management standpoint as well as what our regulatory supervisors believe.

But it's 40 basis points left to come back into capital.

Okay.

Got it.

Thanks a lot.

Kevin Fitzsimmons of Sandler O'Neill.

Good morning, everyone.

Grayson, we are getting to the point obviously where by the end of the first quarter we'll -- you know, the regulators are supposed to be done with their stress tests and there has been a number of [SCAP] banks that have already come out and repaid TARP and raised capital.

Can you help us -- you know, just how you look at that trade-off between if you are on the cusp here over the next few quarters of improving and getting back to core profitability, how do you look at that trade-off between raising now and then, getting out of TARP versus choosing to wait longer if perhaps that amount that you might have to raise is more than you think you are comfortable with, but having that stigma of being perhaps the last TARP bank of this SCAP left with it?

And is that even a stigma that is relevant for competitive reasons?

If you could just give us some sense of how you look at those trade-offs.

Thanks.

Again, our position on prior prepayment really has not been modified.

We still believe that the best strategy is for us to be prudent and patient.

We have discussed at length our capital plans for -- with both our Board and with our regulatory supervisors.

We feel very confident in the plan that we've put together and we believe that we are executing along that plan.

We do believe it is in the best interest of this organization and our shareholders for us to continue to focus on returning to sustainable profitability and getting into position with credit.

We are -- both our Board, our shareholders and our supervisors are still confident in repayment and repayment on terms that are more favorable.

So we will continue to be patient and prudent.

We are working through that.

And I do think that, obviously, with the activities going on around us, that we watch those very carefully, understanding how those decisions are being made.

I do not think that TARP is a competitive problem.

We are not seeing issues with our customers either on a consumer or a commercial side.

The bigger issue with our customers is service, product and making sure that they've got trust and confidence in this organization.

At the end of the day, most of the stigma around TARP is internal with our people and external with our investors.

And so, we are trying to be balanced in our approach, but remain patient and prudent in that regard.

Okay.

Thank you very much.

Chris Mutascio of Stifel Nicolaus.

Good morning.

David, you had mentioned on the loan sales, the problem loan assets that were sold, they took about a 25% discount on the loss on those.

Is that discount to the carrying value of those loans?

It is.

And if that's the carrying value -- that seems like a fairly substantial hit for at least, I would think, some of those are already in the held for sale portfolio.

So what does that mean for future sales?

Do we have 20%, 25% hits coming from problem loans that might be disposed of in future quarters?

Yes, I don't --.

All of those didn't come from held for sale.

I think we have also a chart that shows what our held for sale (multiple speakers).

They came from foreclosed properties, held for sale and a few nonperforming loan assets, too.

That's right.

We think a lot of this is just a larger hit than those coming from a nonperforming loan group.

The held for sale, we -- [of that] 405, we sold approximately 187 coming out of our held for sale in the fourth quarter.

Okay, so the bulk of it was not mark to market?

That's right.

Okay, going forward in terms of loan dispositions, do you think -- will you see the same type of trend where you are starting to see sales of loans from the non-available for sale portfolio?

No, in fact, we want to ensure that's what we are selling and it is going to be coming out of the held for sale portfolio and the change that we are making clearly that we are seeing an inflection point in the market, where, right now, we believe it is in the shareholder's best interest.

And it makes more economic sense that we actually spend more time around the restructuring of these loans versus looking for sale opportunities.

We will always have sale opportunities.

They will always come along and we will address those when we balance that against, is it better for us to hold that asset now and look for a better outcome in the coming quarters?

And again, as you -- what we have coming in, for example, from income-producing properties, there's much more opportunity than there has been in the past for restructures of those loans.

But as far as loan sales though, our priority will continue to be to sell out of our other real estate owned and our held for sale portfolios.

That's right.

If you look at our chart on the back of -- on the supplement on page 23, you'll see we generated gains on our held for sale.

And that is just trying to get the market exactly right.

You'll see we do have some write-downs during the quarter.

They've been pretty negligible, and we have generated some gains each quarter.

So what that tells us is that our marks that we take, when we move things to held for sale, are pretty accurate.

That's the color I was looking for.

So thank you very much.

If I can ask one follow-up, David, you broke even with some gains this quarter, but the book value per share was down about 5% and the changeable book value was down about 5% because of the OCI impact.

Given the balance sheet restructuring, if you will, on the investment security side that you took during the quarter, could we see some modest deterioration in tangible book value if interest rates continue to rise because of the hits you -- any further hits you take in the OCI on the new investment securities portfolio?

Well, without giving you explicit earnings guidance, I would tell you if you just look at that, the impact of that clearly if the 10-years going up, everybody is going to have more risk in terms of unrealized gains either deteriorating or generating unrealized losses, which would put pressure on your tangible book value.

But we had a pretty wild swing in the 10-year this fourth quarter.

And we don't see that -- we see that change moderating some as we go through the first quarter.

So we think the risk of having a tremendous reduction, if you will, in tangible book values from that alone is far lower than it was in the fourth quarter.

Great.

Thank you very much.

Heather Wolf of UBS.

Good morning.

Just a couple of quick questions on your C&I growth.

The 5% quarter-over-quarter growth, how much of that do you think is seasonal, due to inventory investments?

Well, I would say that clearly there is a seasonal aspect to our business and, generally, the fourth quarter is a good quarter for our commercial lending business.

But in -- when you look at comparing our rates to the same period last year, as I mentioned a moment ago, that our commercial business excluding investor real estate's up 50% and even if you include investor real estate, it is up 44%.

So while there's a seasonal aspect to it, we are seeing a real shift in demand and it really, again, as I mentioned earlier in my presentation, it is really not about increased line utilization.

We only saw a very minor improvement in line utilization.

We are right at 40%.

Most of it was really around capital expenditures for equipment, in particular, technology, also in acquisitions of companies and/or properties.

And again, most of the growth we saw, the three segments I pointed out was healthcare, energy and also asset-based lending.

So it sounds like you think the growth rate for this category in 2011 can accelerate from where we -- from that 5%, even though you think there was a little bit of seasonality in that?

We think that opportunity exist depending on what assumptions you make about the economy.

If the economy continues to trend at a very positive -- in as positive a light as it has in the last few months, then I think that there is obviously upside opportunity for us in that particular segment.

Okay.

Great.

And then just one last question.

You guys don't provide the loan yields yet for the individual categories.

Can you give us a feel for what happened to C&I loan yields quarter over quarter?

We have been given that guidance -- David, do you want to make a comment on that?

They are up.

We gave you guidance in total.

We just haven't broken it down by quarter.

But in that particular segment, they're up fairly close to what we told you in terms of total loan portfolio.

Great.

Thanks so much.

Brian Foran of Nomura.

Good morning.

Just circling back to the NIM issue.

I guess one of the questions I get a lot and I hear you on that, the sensitivity, the excess cash, the NPA drag.

But a lot of banks have similar issues and you are the last of the big banks that is at 3% or I guess a little bit below next quarter.

So I mean, is it just that you have these issues in outsized proportion or when you benchmark yourself, relative to all the peers is there something else that is wrong right now?

You know, I hear you that everybody still has similar issues but I think we have probably more excess liquidity.

That's 11 -- 11 basis points from a credit standpoint, nonaccruals and interest reversals.

That is about 16 basis points for us.

And it has been in that range just about all year.

I think one of the key things we wanted to talk about and will do, over time, is changing our mix of business and our loan portfolio, which is more largely concentrated on the business loan side versus consumer side and I think with the exception of one or two others they have a bigger consumer book than we do.

So we are going to look to move that.

We think the ability to forecast losses in the consumer will -- is a little easier than on the commercial side.

So that's -- you could price for that better.

And I think the overall yields there will help us.

So you know, our consumer book is really made up of two things.

The one-to-four family and then also the HELOC book.

And our HELOC book is about 90 basis points below where our peers are.

So over time we'll get that out.

As people refinance their mortgage we can get the rates up on our HELOC book.

That's helpful.

And then, I guess that was really my only question.

Thanks.

Well, I think the other -- following up on that same question.

I think the other factors you have to place and there is that the mix of fixed-rate loans to variable rate loans and we went into this cycle with a lot more variable rate than our competitors and have paid a price for it.

As you know, certainly as we move forward, we are going to come closer to [peer], but it's really on the lending side.

The deposit mix, obviously our deposit costs were too high a year ago.

We have moved that more to peer levels, but our loan yields still we haven't gotten to the peer level.

Part of it is mix and part is pricing and we make improvements on both.

Actually if I could ask one follow-up.

On the performing nonperformers, is there enough experience so far to tell us what the difference in ultimate charge-off rates is on nonperforming nonperformers versus performing nonperformers or are there any stats you can give that help us think about how much lower the loss experience should be on that 37% of the [NPAs] that are current?

We don't have enough history to give you anything that is a percentage wise.

What I can tell you is just [tunnel] experience and what that means is we are able to look at those performing nonperformers in a very different light, i.e., there is much more opportunity for us to restructure them and get them back to accruing status.

So the numbers will tell of themselves in due course.

But I do see them as a much better quality nonperforming loan if there is any such thing.

Great.

Thank you.

Christopher Marinac of FIG Partners.

Just wanted to ask a forward-looking question about TDRs and do you think that the TDRs would come down or trend down the next quarter or two?

Yes.

I think TDRs are going to probably stay relatively stable as we look forward.

And again, remembering that on the TDRs any change that we make to a loan, be it on a consumer or the commercial side, we automatically are flagging it as a TDR, so I really don't see a lot of change on that.

Great.

That's helpful and then, Grayson, real quick on the Morgan Keegan side, do you have any thoughts or goals on offering leverage for having more drop-down to pretax income when you have that sequential core pickups of revenue, like you did last quarter?

Well, I will tell you, we have got John Carson and the team at Morgan Keegan working hard on trying to improve not only topline, but the bottom line.

We have made improvements there and will continue to make improvements there.

As you are well aware, we did an awful lot of legal expense in that group over the past year.

That seems to be subsiding somewhat.

But we are anticipating a better bottom line out of that group in 2011.

Great.

Thanks very much.

Chris Gamaitoni of Compass Point.

Thanks for taking my call.

Just with regard to gaining market share, could you go into a little description on who you are gaining that from, peers of size and in what markets?

I think as the large banks are focused on that higher end corporate customer and the commercial middle market, it seems to be opening up from us, for us.

So I think that the competition is a little less in that commercial middle market and small business in particular, versus a large corporate.

That is where you are seeing really tough competition among all the players and that is where the spreads are getting tight.

And as we had mentioned on previous conferences, is if we want to be paid for the risk that we take.

And we are not going to sacrifice yield just to book production.

So being able to stay in our space that we think we have a competitive advantage for in that commercial middle market, taking it from the big -- bigger players is where we are seeing it.

What I would tell you from looking at the numbers as well as travels around our footprint, we are seeing strong growth.

As I mentioned it is not in one particular place.

I mean, literally, out of our -- we divide our franchise up into 20 markets and literally had growth in C&I in the fourth quarter out of 16 in 20 markets.

In the four markets it didn't grow we're relatively stable.

So when you look at it from a geographic standpoint, we saw especially strong growth in Texas and in Tennessee and in Georgia.

With three markets that we saw -- saw strong growth and two of those markets, Texas and Georgia, we have a fairly limited presence there.

It is a good presence.

It is a good set of bankers but we don't have dominant share in either of those markets.

Tennessee, we have a very dominant share and did very well there, but there are some industries located in Tennessee that gave us particular advantage, in particular, healthcare.

And so we are seeing growth widespread across the franchise and when you look at who we are taking that from, it's varied market by market.

There is still some disruption in the market that we are taking advantage of as events unfold.

But as David said, part of it is is, we focused a little bit lower down into the middle market and lower end of C&I and in the small business in particular which is not -- the competition has not been as stiff there.

All right and then just a quick separate follow-up.

Can you -- how much allowance do you have against your consumer TDRs and what has the re-default rate on that portfolio?

The redefault rate which is 22% every 60 or more and we generally have not provided guidance to this point on how much we have established by way of the reserve against those TDRs.

But the TDR balance is predominantly made up of residential loan assets and recidivism rate as Barb indicated has been 22%.

It's stayed pretty steady at that level for some time now.

Absolutely has].

All right.

Thank you.

At this time, there are no further questions.

I will now turn the call back over to Mr.

Hall for closing remarks.

Well, my sincere appreciation for everyone's time and attention.

And in particular, if you are interested in Regions Financial, we hope today's call was helpful.

We stand adjourned.

Thank you.

This concludes today's conference call.

You may now disconnect.